FSCS initial "net" levy contributions to decrease by £2.4m

The Financial Services Compensation Scheme (FSCS) has set its levy for 2008/09 at £131.7m. The industry will pay an initial net levy of £28.3m in new money for 2008/09 to fund the Scheme.

This reduces the overall bill to the industry by £2.4m from the figure of £30.7m published in the FSCS Plan and Budget 2008/09 after FSCS refined its claims and compensation projections for the year.

Although the bill to the industry has reduced, the total levy requirement for the year shows an increase of £0.9m from original forecasts published in FSCS's Plan and Budget 2008/09 in February, including compensation costs and management expenses. The increase is due to a projected increase in the cost of splits claims and claims against mortgage advisers.

The overall reduction in the industry's net total bill reflects the transitional arrangements for the new funding system, which came into effect on 1 April 2008. Funds held at 31 March 2008 will go back to firms as credit or debit notes as part of the transitional arrangements. FSCS estimates that it will have total closing fund balances of £103.4m at the end of the financial year, slightly higher than previously anticipated.

The proposed levy does not include any provision for possible claims against Pacific Continental Securities Ltd (in liquidation). FSCS is not permitted to levy for costs unless it reasonably expects to need them in the year following the levy. FSCS is working with the liquidators who are still gathering information. We are not yet in a position to gauge the likely volume or value of the claims should the firm be declared in default. A separate levy for costs arising will be made if necessary.

Loretta Minghella, Chief Executive of FSCS, said: "2008/09 is going to be a year unlike any other since FSCS was set up. It is not only bringing continuing uncertainty in the markets but also the introduction of a new, more sustainable funding system.

"This levy reflects a range of factors including a tailing off of mortgage endowment and pensions review claims. The lower number of claims coming in means that FSCS does not need to levy the industry for as much in ‘new money' as in previous years. That will provide some welcome news to the industry. However, we are anticipating higher costs associated with splits and mortgage advice claims. That means that a couple of sub-classes will see moderate increases in the overall levy for the year after we revised our forecasts for 2008.

The current main drivers of FSCS compensation costs include insurance claims, mortgage endowment claims that are slowing, splits and a less predictable flow of other investment and deposit claims. Both mortgage endowments and pension review claims are on a sustained downward trend.

The Scheme currently forecasts it will receive around 11,000 new claims in 2008/09, significantly less than new claims in 2007/08. FSCS projects that it could complete more than 14,000 claims within the year, including more than 5,000 mortgage endowment claims.

2008/09 is the first year the Scheme has raised a levy from a zero base under the new funding system. Under it the 12 former contribution groups have been replaced with five new funding classes consisting of deposit, general insurance, home finance, investments and life and pensions. Within these classes are sub-classes for providers and intermediaries (except for the deposit class).